Case Study on Enforceability of Non-Compete Clauses under Indian Laws

Facts

In 2018, Mr. Amit Kumar, joined Mobile India, an electronics manufacturing company in Mumbai, India as the Plant Manager. Under his employment agreement with Mobile India, Mr. Amit Kumar could terminate his employment after serving a notice of 2 months. The employment agreement also included a provision on non-compete which read as follows:

“During the period of employment and for a period of two years from termination of the employment (notwithstanding the cause of termination), Amit Kumar shall not directly or indirectly own, be employed or work on behalf of any firm engaged in a business substantially similar and competitive with Mobile India and its branches or associates”.

In December 2019, Mr. Amit Kumar submitted his resignation letter and terminated his employment with Mobile India. In March 2020, the HR manager of Mobile India discovered that Mr. Amit Kumar had joined one of the competitors of Mobile India as the Plant Manager.

Issue

Is this act of Mr. Amit Kumar in violation of the non-compete provision of the employment agreement with Mobile India and can he be restrained from continuing his employment with the competitor of Mobile India or be sued for contractual damages?

Response

On the basis of analysis below and the recent judgements of the courts of India,  there is a high possibility that Mr. Amit Kumar cannot be restrained from continuing his employment with the competitor of Mobile India or be sued for contractual damages as the non-compete clause in the employment agreement with Mobile India, may be deemed to be very wide in its ambit and unreasonable by the courts of India.

Analysis

Under Section 27 of the Indian Contract Act,1872 every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. However, one who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, provided that such limits appear to the Court as reasonable, regard being had to the nature of the business.

Article 19 (g) of the Constitution of India clearly provides every citizen, the right to practice any profession, trade or business. This is not an absolute right, and reasonable restrictions can be placed on this right in the interest of the public.

On account of this fundamental right and the narrow interpretation of Section 27, the courts in India have always been weary of upholding non-compete restrictions and have kept the interpretation of this provision subject to ensure that the principles of justice, morality and fairness are aptly applied, depending upon the facts and circumstances of each case.

While it is a settled position of law that non-compete provisions bind employees during the term of their employment, the position of laws regarding the validity of such restraints on employees after termination of the employment contract is more contentious and adjudicated before the courts. Foreign investors should bear this in mind while entering into employment agreements with their employees in India.

We at D’Andrea and Partners have a team of legal experts who can assist you with your India employment law related queries. Please do get in touch with us at info@dandreapartners.com.

Note: For the ease of our readers, the current article has been written in the form of a case study.